Assume that Smart Technologies Corp. (a U.S company) will have to pay 80 million in 90...

 

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Assume that Smart Technologies Corp. (a U.S company) will have to pay £80 million in 90 days for its purchase order. It has collected the following information: -> - - - 90-day U.S. interest rate = 7% per annum [Note: this is the annualized rate] 90-day British interest rate = 8% per annum 90-day forward rate of British pound = $1.24 Spot rate of British pound = $1.19 The 90-day call option on £80 million with a strike price of $1.20/£ has a premium of $0.011 per pound. The 90-day put option on £80 million with a strike price of $1.31/£ has a premium of $0.021 per pound. Smart Technologies is concerned with the volatile exchange rate between the dollar and the pound and would like to hedge exchange rate exposure. a) Compute the guaranteed dollar cost for the order if Smart Technologies decides to hedge using a forward contract. b) If Smart Technologies decides to hedge using money market instruments (MMH), what action does Smart Technologies need to take? (List all the steps needed). What would be the guaranteed dollar cost for the order in this case? c) If Smart Technologies decides to hedge using options on pounds, what option (call or put) it needs to use? What would be the 'expected' dollar cost? Assume that Smart Technologies regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate. d) Recommend a hedge method for Smart Technologies and explain using the numbers you got from the previous questions (a) to (c). e) Other things being equal, at what forward rate would Smart Technologies be indifferent between the forward and money market hedge? Assume that Smart Technologies Corp. (a U.S company) will have to pay £80 million in 90 days for its purchase order. It has collected the following information: -> - - - 90-day U.S. interest rate = 7% per annum [Note: this is the annualized rate] 90-day British interest rate = 8% per annum 90-day forward rate of British pound = $1.24 Spot rate of British pound = $1.19 The 90-day call option on £80 million with a strike price of $1.20/£ has a premium of $0.011 per pound. The 90-day put option on £80 million with a strike price of $1.31/£ has a premium of $0.021 per pound. Smart Technologies is concerned with the volatile exchange rate between the dollar and the pound and would like to hedge exchange rate exposure. a) Compute the guaranteed dollar cost for the order if Smart Technologies decides to hedge using a forward contract. b) If Smart Technologies decides to hedge using money market instruments (MMH), what action does Smart Technologies need to take? (List all the steps needed). What would be the guaranteed dollar cost for the order in this case? c) If Smart Technologies decides to hedge using options on pounds, what option (call or put) it needs to use? What would be the 'expected' dollar cost? Assume that Smart Technologies regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate. d) Recommend a hedge method for Smart Technologies and explain using the numbers you got from the previous questions (a) to (c). e) Other things being equal, at what forward rate would Smart Technologies be indifferent between the forward and money market hedge?

Answer rating: 100% (QA)

Amount payable 80000000 a Forward cover Forward exchange rate 124Pound Amount payable in USD 9920000... View the full answer